Question to the HM Treasury:

To ask Mr Chancellor of the Exchequer, whether the mandatory binding arbitration clause in the UK’s new tax treaty with Lesotho will help the Lesotho Government to combat tax avoidance and evasion.

The UK’s new tax treaty with Lesotho, in common with all modern tax treaties, includes a “Mutual Agreement Procedure” provision allowing disagreements about the way the treaty should be applied to be resolved by agreement between the authorities in the two countries. The purpose of the mandatory binding arbitration provision is to provide a remedy in the exceptional circumstance that those authorities are unable to reach agreement after discussing the matter for two years. It works by referring the matter to an independent arbitration panel. Each country selects a panel member and those members then select a third member. The decision of the panel is then binding on the two countries. This ensures that disputes do not continue unresolved. Unresolved disputes about the operation of the tax treaty could otherwise result in double taxation; and the fundamental object of a tax treaty is to ensure that such double taxation is eliminated.

The new treaty does contain a number of provisions to combat tax avoidance and evasion. These include the latest OECD standards on the exchange of tax information and mutual assistance in the recovery of tax debts. There are also specific anti-abuse rules in the articles governing the relief from taxation on dividends, interest, royalties and other income. These were included at the UK’s request and protect both countries against improper use of the treaty to avoid domestic tax liabilities.